WEBVTT - High Yield, EM Most Vulnerable To Asset Collapse: TCW's Rivelle 0:00:05.800 --> 0:00:08.720 Welcome to the Bloomberg p m L Podcast. I'm pim Fox. 0:00:08.760 --> 0:00:11.520 Along with my co host Lisa Bramowitz. Each day we 0:00:11.640 --> 0:00:15.120 bring you the most important, noteworthy, and useful interviews for 0:00:15.200 --> 0:00:17.840 you and your money, whether you're at the grocery store 0:00:17.960 --> 0:00:20.720 or the trading floor. Find the Bloomberg p m L 0:00:20.840 --> 0:00:33.440 Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. He 0:00:33.600 --> 0:00:39.120 writes in the recent Insights from TCW that failing to 0:00:39.280 --> 0:00:43.480 prepare is preparing to fail. Tad Ravel is the chief 0:00:43.520 --> 0:00:47.560 investment Officer for fixed income for TCW, helping to manage 0:00:47.560 --> 0:00:51.000 more than a hundred and eighty billion dollars based in 0:00:51.040 --> 0:00:54.000 Los Angeles. Tad Ravel, thank you very much for spending 0:00:54.040 --> 0:00:56.040 time with us. What do you mean by this that 0:00:56.160 --> 0:01:00.880 failing to prepare is preparing to fail. Well, what we're 0:01:00.880 --> 0:01:04.520 speaking to is that there is an asset price cycle. 0:01:04.560 --> 0:01:07.160 There is a credit cycle. Unless this is the first 0:01:07.240 --> 0:01:09.800 one that isn't actually going to be a cycle. We 0:01:09.800 --> 0:01:15.319 should expect that the relatively placid environment of the last 0:01:15.440 --> 0:01:18.640 seven or eight years is ultimately going to have its 0:01:18.680 --> 0:01:22.720 come up in and that it's imperative that investors understand 0:01:22.800 --> 0:01:28.240 that strategies that focused on risk taking and yield emphasis 0:01:28.600 --> 0:01:31.920 will probably have very disappointing results if in fact we 0:01:31.959 --> 0:01:34.600 are in the late stages of the asset price cycle, 0:01:34.959 --> 0:01:38.600 which we do view ourselves as being. So how do 0:01:38.680 --> 0:01:42.840 you respond to people that point to the sort of 0:01:42.959 --> 0:01:45.200 I guess you would call it the disintegration of a 0:01:45.280 --> 0:01:51.520 connection between asset prices and growth in GDP. Right, Well, 0:01:51.600 --> 0:01:55.800 you know that is probably the most consequential place that 0:01:55.880 --> 0:01:58.440 people ought to be looking in terms of understanding where 0:01:58.480 --> 0:02:00.560 you are in the cycle. As we would put it, 0:02:01.000 --> 0:02:04.440 the disconnect that what you alluded to, the disconnect in 0:02:04.480 --> 0:02:09.200 which asset prices are so robust against the backdrop where 0:02:09.200 --> 0:02:12.040 GDP has been growing at very muted rates for a 0:02:12.160 --> 0:02:14.720 very long period of time, suggests that there is in 0:02:14.800 --> 0:02:18.880 fact that disconnect, as you say, between asset prices and income. 0:02:19.240 --> 0:02:24.840 If you disaggregate asset prices into their constituent pieces, obviously 0:02:24.880 --> 0:02:28.880 what you have is equities, real estate, bonds, et cetera. 0:02:29.240 --> 0:02:32.400 And when you have this large disparity between asset prices 0:02:32.400 --> 0:02:35.320 and GDP, which you're really saying is that one or 0:02:35.400 --> 0:02:39.360 all of the following are true. Pe ratios are being stretched. 0:02:39.760 --> 0:02:43.000 Cap rates in real estate are very low, or bond 0:02:43.200 --> 0:02:47.040 yields and bond spreads are also quite quite compressed. What 0:02:47.160 --> 0:02:49.600 it also means, of course, and just thinking about it 0:02:49.800 --> 0:02:53.200 in an equity formulation, if asset prices are high, if 0:02:53.320 --> 0:02:57.760 asset multiples are or pe multiples are high, ordinarily as 0:02:57.880 --> 0:03:01.679 enterprise multiples left, so do debt multiples. If debt multiples 0:03:01.680 --> 0:03:04.040 are lifting at the same time that income and GDP 0:03:04.200 --> 0:03:06.000 is muted, sooner or later, you're going to have a 0:03:06.000 --> 0:03:10.000 debt servicing problem. Well, then speak about this debt servicing 0:03:10.040 --> 0:03:15.400 problem in the context of low discount rates that were 0:03:16.120 --> 0:03:19.240 available at one time but may not be available in 0:03:19.280 --> 0:03:23.440 the future. Right so to to a very great degree, 0:03:23.680 --> 0:03:27.359 maybe this also speaks to another kind of disconnect I'll 0:03:27.400 --> 0:03:30.640 call it the central bankers disconnect. Is that traditionally you 0:03:30.680 --> 0:03:33.960 think of capitalism this way that when your labor and 0:03:34.040 --> 0:03:37.840 capital are efficiently configured in your economy, your profits are 0:03:37.880 --> 0:03:39.920 going to be growing, your wages are going to be growing, 0:03:39.920 --> 0:03:42.560 your GDP is going to be growing. That's just another 0:03:42.600 --> 0:03:47.160 way of saying that prosperity should naturally lift asset prices. Instead. 0:03:47.200 --> 0:03:49.400 What the central banks in effect have done over the 0:03:49.440 --> 0:03:52.560 course of this cycle is they short circuited the process. 0:03:52.600 --> 0:03:56.760 They forced rates lower through quantitative easing, through zero rates, 0:03:56.840 --> 0:03:59.440 negative rates in Europe and so forth, and by driving 0:03:59.440 --> 0:04:03.280 the discount rates down. Uh, the result has been a 0:04:03.760 --> 0:04:08.080 surge in asset prices. But the surgeon asset prices. It's 0:04:08.120 --> 0:04:11.520 not the case that high asset prices create the prosperity. 0:04:11.560 --> 0:04:15.880 The causation is completely reversed. And so now we believe 0:04:15.920 --> 0:04:19.080 you're in a late cycle type of environment, and ultimately 0:04:19.240 --> 0:04:22.839 you're going to have to resolve this disparity, this wedge 0:04:22.880 --> 0:04:26.640 between high asset prices and low GDP growth against the 0:04:26.680 --> 0:04:31.479 backdrop of substantially expanded leverage in the system that was 0:04:31.520 --> 0:04:35.480 incentivized by these low discount rates that you allude to. Well, 0:04:35.640 --> 0:04:39.760 does resolving this disparity? Is that a diplomatic way of 0:04:39.800 --> 0:04:45.280 saying that we are headed for some real problems? Yes, 0:04:46.800 --> 0:04:49.440 I guess you said it much more directly that there's 0:04:49.480 --> 0:04:52.960 only one of two possibilities, as as the Great Lord 0:04:53.080 --> 0:04:57.480 Kine's put it, Uh, if a trend is unsustainable, then 0:04:57.520 --> 0:05:00.920 at some point it will stop. This idea asset prices 0:05:00.960 --> 0:05:05.039 can permanently disconnect and continue it um or work in 0:05:05.080 --> 0:05:09.039 a in a dynamic that's completely disconnected from the income economy, 0:05:09.080 --> 0:05:12.760 the wealth economy. That is what I'm referencing. It's it's absurd. 0:05:12.880 --> 0:05:16.040 So either we're going to get just a massive surge 0:05:16.080 --> 0:05:20.200 in GDP growth going forward to validate and justify the 0:05:20.240 --> 0:05:24.720 increase in asset prices, or in most most probably you're 0:05:24.760 --> 0:05:28.240 going to have to see a reduction in asset prices 0:05:28.279 --> 0:05:32.720 to uh correspond back to the GDP. And the mechanism 0:05:32.839 --> 0:05:36.720 by which you get there is probably already being laid 0:05:36.720 --> 0:05:39.360 out in front of us. It's the FED tightening, it's 0:05:39.360 --> 0:05:42.680 the quantitative tightening as well as the actual rise in 0:05:42.720 --> 0:05:46.040 the overnight rate. So does that mean that tad Rivella 0:05:46.120 --> 0:05:49.120 is talking himself into a job of managing cash for 0:05:49.160 --> 0:05:56.280 a while? Well, that that's probably an unnecessary, um uh 0:05:56.720 --> 0:06:00.800 extreme step, although maintaining a proper level of liquidity is 0:06:00.800 --> 0:06:03.039 probably always a smart thing to do. But in a 0:06:03.120 --> 0:06:05.640 late cycle environment, what it really means is that you're 0:06:05.640 --> 0:06:09.599 supposed to recall what Benjamin Graham said a long time 0:06:09.640 --> 0:06:12.919 ago that bond selecting is a negative art. Uh. It 0:06:13.000 --> 0:06:15.159 may not be a negative art in the early and 0:06:15.240 --> 0:06:18.600 mid stages of the cycle, when leverage is increasing and 0:06:18.680 --> 0:06:21.480 almost everything that you do. UM, everything that you do 0:06:21.560 --> 0:06:24.200 from a risk seeking point of view tends to do 0:06:24.320 --> 0:06:27.000 rather well in the late stages of the cycle. You 0:06:27.080 --> 0:06:30.920 have to be very careful about not selecting assets that 0:06:31.000 --> 0:06:33.440 we would deem breakable in the sense that they're going 0:06:33.520 --> 0:06:36.800 to give you a permanent impairment of principle. And so 0:06:36.880 --> 0:06:40.400 that means that when you survey your allocations to things 0:06:40.520 --> 0:06:43.039 like high yield and in some of the more leveraged 0:06:43.040 --> 0:06:45.880 area of the corporate market, is be careful. There are 0:06:45.920 --> 0:06:50.400 ways to continue to capture yield premium even in a 0:06:50.400 --> 0:06:53.840 asset price come up and bear market. In in in 0:06:54.040 --> 0:06:56.479 risk there are plenty of things that work out, but 0:06:56.520 --> 0:06:59.360 there's a lot of things that may be very disappointing 0:06:59.640 --> 0:07:02.920 in terms of where where they end up. Where do 0:07:02.960 --> 0:07:06.640 you believe you'd see the first indications of these problems. 0:07:06.680 --> 0:07:08.880 Would it be and let's say the leverage loan market, 0:07:08.920 --> 0:07:13.080 would it be in high yield debt? Well, the places 0:07:13.120 --> 0:07:16.960 that are probably most vulnerable UM would be in the 0:07:17.040 --> 0:07:19.720 part of the high yield market, particularly that part of 0:07:19.760 --> 0:07:24.160 the market that has been so overgrown with covenant light 0:07:24.200 --> 0:07:27.520 debt issuance. And although covenant light sounds like a sort 0:07:27.560 --> 0:07:30.760 of a technical, almost obscure term. What it really comes 0:07:30.800 --> 0:07:34.240 down to is we're always supposed to remember that a 0:07:34.280 --> 0:07:38.400 corporate management has a fiducial obligation to its shareholders, but 0:07:38.480 --> 0:07:42.040 a contractual one to its bondholders. So what that means 0:07:42.120 --> 0:07:46.760 is that a business can have uh good potential as 0:07:46.800 --> 0:07:51.080 a business, but without a properly constructed set of covenants 0:07:51.120 --> 0:07:55.520 for the bondholder, it's also possible for management to essentially 0:07:55.840 --> 0:08:00.920 uh spin those assets off the shareholders, pay sell assets, 0:08:00.920 --> 0:08:04.640 and pay special dividends, and essentially leave the bond holder 0:08:04.840 --> 0:08:08.320 holding the bag. So the fact that covenant light issuance 0:08:08.520 --> 0:08:11.680 is essentially off the charts, it's much greater than we've 0:08:11.680 --> 0:08:15.800 ever ever seen it. It's a very um imprudent form 0:08:16.000 --> 0:08:19.200 of lending. So you should expect that when the Fed 0:08:19.320 --> 0:08:22.400 raises rates, it also strengthens the dollar and you start 0:08:22.440 --> 0:08:25.120 to see cracks develop in parts of the emerging market. 0:08:25.360 --> 0:08:28.000 We've seen that just in the last week with Argentina 0:08:28.400 --> 0:08:31.560 and to a slightly lesser degree, Turkey and maybe Indonesia 0:08:31.600 --> 0:08:34.760 as well. Thank you very much, tad Rivell joining us 0:08:34.800 --> 0:08:38.040 as the Chief Investment Officer for fixed Income at the 0:08:38.120 --> 0:08:41.160 tc W group helping to manage more than a hundred 0:08:41.200 --> 0:08:59.040 and eighty billion dollars global value. What is a global 0:08:59.320 --> 0:09:02.800 value investing perspective? Here to help us understand this is 0:09:02.840 --> 0:09:07.040 Thomas Russo, managing member of a gardener Russo and Gardener, 0:09:07.160 --> 0:09:10.800 helping to manage more than ten billion dollars of customer assets. 0:09:10.840 --> 0:09:13.760 Based in Lancaster, Pennsylvania. He joins us here in our 0:09:13.800 --> 0:09:16.520 eleven three oh studios. Tom, it is a pleasure to 0:09:16.559 --> 0:09:18.640 see you. Thank you very much for coming in. I 0:09:18.679 --> 0:09:21.600 want to jump right into it and specifically start about 0:09:22.000 --> 0:09:26.520 talking about tobacco stocks. Because tobacco stocks, let's leave aside 0:09:26.559 --> 0:09:31.080 for the moment. Uh, they're the products in terms of 0:09:31.360 --> 0:09:36.080 whether you are for or again smoking and the health concerns. 0:09:36.440 --> 0:09:38.959 Many people have invested in these stocks because they have 0:09:39.080 --> 0:09:44.160 looked forward to what are many consider rich dividends. Yes, 0:09:44.480 --> 0:09:47.280 do you believe that that's still a valid thesis? Well, 0:09:47.320 --> 0:09:50.080 it certainly has been over the past four or five 0:09:50.160 --> 0:09:53.040 or six years as rates short end and the curve 0:09:53.080 --> 0:09:55.760 have been so low, and so people have sort of 0:09:55.800 --> 0:09:59.000 been pushed into equities and search for yield, and they've 0:09:59.000 --> 0:10:02.480 had the highest the highest levels of yield. Um. Uh, 0:10:02.480 --> 0:10:05.280 and it's in large measure because up until recently they've 0:10:05.640 --> 0:10:08.160 they've lacked the ability to reinvest a lot of money 0:10:08.200 --> 0:10:12.320 in the business. UM historically, um UH, and and the 0:10:12.360 --> 0:10:16.800 dividend yields five percent plus for um Fillmore's International and 0:10:17.040 --> 0:10:19.840 roughly the same for all three have attractive capital historically. 0:10:20.440 --> 0:10:22.680 So do you think that they are still attractive for 0:10:22.760 --> 0:10:25.760 people looking for dividends? No, I think the I think 0:10:25.800 --> 0:10:29.200 the search for yield actually has has already sort of 0:10:29.240 --> 0:10:33.480 begun to reverse because the two year treasury yields close 0:10:33.520 --> 0:10:36.480 to two point seven percent today, and that's fully more 0:10:36.520 --> 0:10:39.040 than many public companies have as as their dividends, and 0:10:39.080 --> 0:10:42.680 so it's adequate. It's adequate to keep people away from equities. 0:10:42.679 --> 0:10:45.240 They don't have to chase after equities just to get yield. 0:10:45.240 --> 0:10:49.400 Two point whatever it is is close enough. The issues 0:10:49.480 --> 0:10:53.320 with them, the three areas that you site tobacco and 0:10:53.679 --> 0:10:58.400 beer and and UH and banking, is that, interestingly all 0:10:58.520 --> 0:11:02.600 three of them stumble and and struggle today because they're 0:11:02.600 --> 0:11:06.360 going through a remarkable period of transition. Those are traditional 0:11:06.400 --> 0:11:08.960 old businesses. You can't imagine anything quite as long standing 0:11:08.960 --> 0:11:13.080 as tobacco, banking, and and UH and beer. Um, But 0:11:13.200 --> 0:11:15.560 each of the business is that we're involved with there 0:11:15.640 --> 0:11:19.680 have new elements that make the future seem more cloudy 0:11:19.720 --> 0:11:23.839 than than the past. Okay, but just final question on 0:11:23.960 --> 0:11:25.720 tobacco stocks and then what we can go on and 0:11:25.800 --> 0:11:30.760 talk about a by shares of Philip Mooreton International are 0:11:30.800 --> 0:11:34.000 down by more than a fifth. Yes, so far this year, 0:11:34.280 --> 0:11:36.880 as you say, they currently pay a five percent did 0:11:37.160 --> 0:11:40.400 end um? Is this a stock in your opinion whose 0:11:40.440 --> 0:11:44.319 time has come and gone. No, No, it's a position 0:11:44.960 --> 0:11:49.160 still in my portfolios. Um, it's a it's a stock 0:11:49.240 --> 0:11:52.600 which evidence is the expression at this moment that no 0:11:52.679 --> 0:11:56.440 good deed in life goes unpunished. It's Philip Morris says 0:11:56.520 --> 0:11:59.920 alone in the industry, over the past five years, directed 0:12:00.160 --> 0:12:04.080 over two and a half billion dollars of shareholder money 0:12:04.120 --> 0:12:09.720 to develop a reduced risk product, a cigarette substitute that 0:12:09.880 --> 0:12:14.600 satisfies adult consumers who wish to quit, which are effectively 0:12:14.679 --> 0:12:17.720 half the community of smokers in the world over, probably 0:12:17.760 --> 0:12:21.080 a hundred and fifty million people would love to quit, 0:12:21.480 --> 0:12:24.160 and yet they haven't had something they worked. Philip Morris, 0:12:24.240 --> 0:12:27.400 after having spent invested two and a half billion dollars, 0:12:27.840 --> 0:12:30.400 has a product that works, and in fact, in Japan 0:12:30.520 --> 0:12:32.960 and other markets where it's rolled out, they now have 0:12:33.000 --> 0:12:38.240 close to market share themselves. Uh. In In this in 0:12:38.400 --> 0:12:42.840 what was the tobacco industry is now split with combustible 0:12:42.840 --> 0:12:45.720 cigarettes and the product that Philip Morris invented called the icos, 0:12:45.760 --> 0:12:50.280 which is a non combustible cigarette, and everything's moving along 0:12:50.400 --> 0:12:53.520 swell up until a couple of weeks ago they had 0:12:53.520 --> 0:12:56.600 a stumble in the in the rollout of of a 0:12:56.640 --> 0:13:00.960 new device that's attached to this product, and that caused 0:13:01.000 --> 0:13:04.800 some investor concerned. There was a slowdown in the cigarettes 0:13:04.880 --> 0:13:08.240 that go with that product, and the market became a 0:13:08.240 --> 0:13:11.720 bit uh disenchanted with the near term prospers. The long 0:13:11.840 --> 0:13:15.480 term process of completely unaffected by this UM as far 0:13:15.520 --> 0:13:17.480 as I can tell. And then on top of it, 0:13:17.480 --> 0:13:22.400 it's it's a regulatory thing. The US FDA has resisted 0:13:22.720 --> 0:13:27.640 allowing this product into the market, despite the fact that 0:13:27.760 --> 0:13:30.800 it has helped nearly six million smokers around the world 0:13:30.840 --> 0:13:35.080 in the last two years alone quit forever cigarettes and 0:13:35.160 --> 0:13:39.040 so UM we believe that that relief from the FDA 0:13:39.200 --> 0:13:42.880 will have to come because the product being adopted by 0:13:43.160 --> 0:13:46.320 millions of people overseas, leaves of the US seeming a 0:13:46.320 --> 0:13:49.360 bit of isolationists as it relates to a product that 0:13:49.360 --> 0:13:53.000 has effectively helped people for the first time ever quit Now, 0:13:53.040 --> 0:13:55.640 that's one thing then, and I think at five five 0:13:55.679 --> 0:13:59.199 percent yields at thirteen times that income in this marketplace. 0:13:59.600 --> 0:14:03.679 The investments are in Altria in Philip Morris are quite 0:14:03.679 --> 0:14:06.280 reasonably priced, especially as I do believe that the product 0:14:06.360 --> 0:14:08.920 that both of them will share and we'll finally get 0:14:09.160 --> 0:14:12.200 approved by the U s f D. A. Thank you 0:14:12.320 --> 0:14:14.199 very much, Tom Russo. I look forward to having you 0:14:14.240 --> 0:14:16.000 in the future. You got to talk more about your 0:14:16.280 --> 0:14:19.720 value strategy and get your insight into what's going on 0:14:19.760 --> 0:14:22.080 in the beer industry because, as you say, going through 0:14:22.440 --> 0:14:25.520 lots of changes. Tom Russo is managing member of Gardner 0:14:25.600 --> 0:14:28.520 Russo and Gardner, helping to manage more than ten billion 0:14:28.560 --> 0:14:32.960 dollars based in Lancaster, Pennsylvania, joining us here in our 0:14:33.120 --> 0:14:51.680 eleven three oh studios. Well, if you've been scouring the 0:14:51.840 --> 0:14:55.960 quarterly reports of companies such as Netflix, Microsoft, or Google's 0:14:56.000 --> 0:14:59.320 Alphabet or even Oracle looking for how much cash they 0:14:59.360 --> 0:15:03.400 have held overseas, good luck you won't find it. Brandon 0:15:03.520 --> 0:15:06.720 Couch Codin is a managing editor for Bloomberg News, and 0:15:06.800 --> 0:15:10.720 he joins us now to explain why, all right, Brandon, 0:15:10.920 --> 0:15:16.360 why aren't companies reporting how much money they have held overseas? Yeah, 0:15:16.360 --> 0:15:18.800 I mean, the simple answer is they don't have to. Um. 0:15:19.120 --> 0:15:22.920 The the more complicated one is basically, um, with the 0:15:22.960 --> 0:15:26.520 tax law changes, Um, every company how to pay these 0:15:26.560 --> 0:15:29.360 this mandatorily? How to pay this tax? Already they can 0:15:29.360 --> 0:15:31.000 space it out over eight years, but they have to 0:15:31.000 --> 0:15:33.880 pay this tax on their fore and holdings. So cash 0:15:33.960 --> 0:15:36.720 anywhere in the world is basically fungible. Now. Yeah, but 0:15:36.800 --> 0:15:39.600 why wouldn't they want to report that they had, let's say, 0:15:39.600 --> 0:15:42.160 brought the money back to the United States, if indeed 0:15:42.160 --> 0:15:45.880 they did so. And that's the question that tax experts 0:15:45.880 --> 0:15:49.400 we talked to are asking. Um, they're looking for, you know, 0:15:50.000 --> 0:15:52.040 changes in disclosure right now because they haven't gotten a 0:15:52.040 --> 0:15:54.280 lot of guidance from the I R S. All Right, 0:15:54.400 --> 0:15:57.360 So if the company doesn't bring back the cash from 0:15:57.400 --> 0:16:00.360 the United States, there's no way to know this now, 0:16:01.320 --> 0:16:03.360 at least not from their quarterly reports. We might see it, 0:16:03.520 --> 0:16:06.160 um through other filings, some of them are actually disclosing. 0:16:06.200 --> 0:16:08.040 I mean, we have an example in there from Google 0:16:08.080 --> 0:16:11.560 I believe that they told us how much UM tax 0:16:11.600 --> 0:16:13.520 they paid, so from there you can kind of back 0:16:13.640 --> 0:16:15.440 end it and get a sense of how much they 0:16:15.440 --> 0:16:17.920 brought back. But it's up to them, I mean, otherwise 0:16:17.960 --> 0:16:20.320 we're not going to know. And what about other companies. 0:16:20.360 --> 0:16:25.440 I mean I mentioned Microsoft, Netflix, Alphabet the parent company 0:16:25.440 --> 0:16:28.160 of Google, as well as Oracle and Apple. They don't 0:16:28.520 --> 0:16:31.200 report this and in some cases I should just mention 0:16:31.280 --> 0:16:35.160 that it isn't something that's just happened, correct exactly. So 0:16:35.240 --> 0:16:39.040 Apple stopped last year at the end of their I 0:16:39.040 --> 0:16:41.400 guess their fiscal first quarter whatever whatever it was. They're 0:16:41.480 --> 0:16:44.520 back in October UM and then you know, the same thing. 0:16:44.520 --> 0:16:47.560 I think Cisco stopped a little bit earlier. Otherwise we're 0:16:47.600 --> 0:16:49.840 seeing them stop at this first quarter recording after tax 0:16:49.920 --> 0:16:52.840 law went into effect. And what about other companies? Are 0:16:52.920 --> 0:16:55.760 other companies like Coca Cola, for example, are they still 0:16:55.800 --> 0:16:58.600 reporting how much money they have? That's that's sort of 0:16:58.600 --> 0:17:01.040 the interesting part to us right now is seeing who's 0:17:01.040 --> 0:17:03.760 reporting and who is and so Coke and Pepsi both are, 0:17:04.040 --> 0:17:08.439 g Caterpillar both are um. Facebook is some of the 0:17:08.480 --> 0:17:10.800 interesting things to get to see now is someone like 0:17:10.880 --> 0:17:13.479 Facebook there you actually have more cash overseas now than 0:17:13.520 --> 0:17:17.439 they did before, so it's not quite having the effect 0:17:17.480 --> 0:17:20.000 we thought it would. The question is whether how much 0:17:20.040 --> 0:17:22.560 it is just how much it matters now the new 0:17:22.680 --> 0:17:24.760 rule is at a one time rate of what like 0:17:24.840 --> 0:17:27.920 fifteen and a half percent for the cash and eight 0:17:28.040 --> 0:17:32.640 percent for non cash or illiquid assets exactly, And and 0:17:32.680 --> 0:17:36.199 they have that's on what they were holding. Um. They 0:17:36.240 --> 0:17:38.080 have eight years to pay that, though they can space 0:17:38.119 --> 0:17:41.280 it out, so there's sort of that um opacity right 0:17:41.280 --> 0:17:43.200 now in terms of when they're paying it. And that's 0:17:43.359 --> 0:17:44.960 something we're all gonna care about because it's going to 0:17:45.000 --> 0:17:49.120 have an impact. So this would then make the actual 0:17:49.480 --> 0:17:52.840 cash amount that is listed in the quarterly report a 0:17:53.000 --> 0:17:57.120 total obviously for the entire company, and it would be 0:17:57.160 --> 0:18:01.960 treated the same as if it was in the United States. Yeah, exactly, 0:18:02.000 --> 0:18:04.120 So what they held overseas, that's what's going to get 0:18:04.119 --> 0:18:07.160 taxed at those rates for this one time sort of 0:18:07.280 --> 0:18:11.880 um you know, repatriation holiday, we want to call it that, um. Otherwise, 0:18:11.920 --> 0:18:14.840 now it's all being treated the same. The questions are 0:18:14.880 --> 0:18:17.760 becoming now, um around if if we're going to see, 0:18:17.800 --> 0:18:19.760 you know, what the global minimum rates going to be 0:18:19.800 --> 0:18:23.680 and if this is a permanent situation, or if companies 0:18:23.680 --> 0:18:26.480 are keeping it overseas just in case something changes, and 0:18:26.480 --> 0:18:28.360 and that there might be an advantage down the road 0:18:28.440 --> 0:18:30.880 because previously they had to pay what a thirty five 0:18:30.920 --> 0:18:33.040 percent tax if they wanted to bring the money back 0:18:33.040 --> 0:18:35.480 into the United exactly. And so that was always the 0:18:35.520 --> 0:18:39.679 rationale for why I was saying, quote locked overseas um 0:18:39.720 --> 0:18:42.160 you know, like we see we see it in the article. 0:18:42.200 --> 0:18:44.600 We have tax experts that are that are saying, you know, look, 0:18:44.640 --> 0:18:46.640 we tried this before in two thousand four. We didn't 0:18:46.640 --> 0:18:49.320 see a ton come back. You know, we're doing it now, 0:18:49.840 --> 0:18:52.440 expected to be sort of tactical, and don't expect this 0:18:52.520 --> 0:18:54.479 all to all of a sudden, you know, come on 0:18:54.560 --> 0:18:57.960 to us accounts. And one of the reasons why investors 0:18:57.960 --> 0:19:01.439 would look at the cash position of a company is 0:19:01.520 --> 0:19:05.200 that when you do a total valuation of the company's stock, 0:19:05.640 --> 0:19:07.320 you want to back out, or at least you want 0:19:07.320 --> 0:19:09.320 to make note of how much cash they have on 0:19:09.359 --> 0:19:11.480 their books, because that would then be something you could 0:19:11.520 --> 0:19:15.520 deduct from the actual share price. Yeah, of course, all right, 0:19:15.680 --> 0:19:19.000 And any word from the Internal Revenue Service as to 0:19:19.280 --> 0:19:23.000 whether they're going to make this kind of filing, uh, 0:19:23.280 --> 0:19:26.000 you know, mandatory in the future in order to sort 0:19:26.040 --> 0:19:28.480 of see or check to see whether the law itself 0:19:28.600 --> 0:19:31.760 was was effective. Everyone we've talked to is said that 0:19:31.800 --> 0:19:33.680 there's you know, the problem right now is the lack 0:19:33.680 --> 0:19:35.520 of guidance from the I R S. So there hasn't 0:19:35.520 --> 0:19:38.159 been anything to that effect yet. All right, well, thanks 0:19:38.480 --> 0:19:42.760 for the guidance. Appreciate it. Brandon Couch Cotton is managing 0:19:42.840 --> 0:19:45.760 editor for a Bloomberg News on the story that the Apple, 0:19:45.800 --> 0:19:49.360 along with a variety of other companies such as Netflix, Microsoft, 0:19:49.760 --> 0:19:53.800 as well as Oracle, uh not reporting how much money 0:19:53.920 --> 0:19:58.160 or cash they have on their books outside the United States, 0:20:12.720 --> 0:20:17.080 go public or get sold. Well, there may be an 0:20:17.080 --> 0:20:21.520 advantage to being acquired. Sandy Miller is the general partner 0:20:21.600 --> 0:20:25.720 at Institutional Venture Partners i v P, based in San Francisco, 0:20:26.080 --> 0:20:28.520 and Sandy joins us now to explain what's going on 0:20:28.560 --> 0:20:31.639 in the world of technology and initial public offerings and 0:20:31.840 --> 0:20:34.400 mergers and acquisitions. Sandy, thank you very much for being 0:20:34.720 --> 0:20:36.920 with us. You know, one of the things and preparing 0:20:36.960 --> 0:20:38.960 for this, I was taking a look at Snap, which 0:20:39.040 --> 0:20:42.960 was a headline grabbing initial public offering. It came public 0:20:43.000 --> 0:20:46.879 at seventeen. It currently trades around ten dollars a share. 0:20:47.560 --> 0:20:49.880 UH that's a decline of a little bit more than 0:20:49.960 --> 0:20:55.199 forty percent. On the other hand, mule Soft was acquired 0:20:55.440 --> 0:20:58.480 by Salesforce dot Com in March of this year for 0:20:58.560 --> 0:21:03.080 a price of five point six billion dollars. And also 0:21:03.119 --> 0:21:05.879 looking at the number of technology initial public offerings, I 0:21:05.880 --> 0:21:08.720 think they are about six that are currently trading year 0:21:08.800 --> 0:21:11.520 to date. Give us your overview of what is going 0:21:11.560 --> 0:21:14.960 on in the world of funding for a large technology 0:21:15.040 --> 0:21:19.040 companies such as the Sandy sure Well's first. It's a 0:21:19.119 --> 0:21:22.320 very healthy environment. The i p O s for for you. 0:21:22.400 --> 0:21:25.920 I'm looking here at US technology companies have really been 0:21:25.960 --> 0:21:28.679 working well. The last three that have gone Carbon Black 0:21:29.080 --> 0:21:33.000 Smartsheet Docum sign all raised the range from the initial 0:21:33.000 --> 0:21:37.000 filing range, priced adder above the range and traded up 0:21:37.000 --> 0:21:41.239 an average of Actually the nets consistent. It's actually been 0:21:41.320 --> 0:21:44.480 fifteen US tech i p O so far this year, 0:21:44.760 --> 0:21:48.399 which is running well ahead of and they're up an 0:21:48.400 --> 0:21:51.919 average of the most prominent one. The biggest name of 0:21:51.920 --> 0:21:55.240 the group was Dropbox. UH was an i VP portfolio 0:21:55.320 --> 0:21:59.240 company which has traded up over so deals are working 0:21:59.760 --> 0:22:02.960 Um it's not really that a surprise because there's a 0:22:03.119 --> 0:22:05.600 there's great companies as a backlog of great companies that 0:22:05.640 --> 0:22:09.240 are expecting to see more I p O s. UM. 0:22:09.280 --> 0:22:13.520 They're benefiting from obviously deals perform and money managers are 0:22:13.520 --> 0:22:16.480 looking to add to the these companies to their portfolio 0:22:16.560 --> 0:22:19.320 to you know, as a form of alpha. And they're 0:22:19.359 --> 0:22:23.320 benefiting from a favorable regulatory environment because the Jobs Act, 0:22:23.320 --> 0:22:26.760 which wanted to affect several years ago, has been expanded 0:22:26.800 --> 0:22:30.760 to include larger tech companies. Uh and some of these 0:22:30.800 --> 0:22:33.040 new I p O s are pretty mature companies that 0:22:33.040 --> 0:22:36.040 that didn't meet the standards of the Emerging market UM 0:22:36.480 --> 0:22:39.400 qualifications for the job back but now they too. All 0:22:39.440 --> 0:22:41.439 the all the companies, not just tech of course, but 0:22:41.480 --> 0:22:45.280 all the companies can can use the confidential filing and 0:22:45.320 --> 0:22:48.000 the test the waters features of the Jobs Act, which 0:22:48.040 --> 0:22:50.320 has been a great boon to the I p O 0:22:50.440 --> 0:22:53.600 market because it gives CEO is much more confidence that 0:22:53.680 --> 0:22:55.960 if they go through the process that it's going to 0:22:56.000 --> 0:22:59.040 be successful. UM. So I think it's a very healthy 0:22:59.119 --> 0:23:01.720 environment for ips. But one of the things that I 0:23:01.760 --> 0:23:04.399 wanted to mention really was the M and A market. 0:23:04.480 --> 0:23:07.159 You mentioned the mule Soft acquisition happened to be one 0:23:07.200 --> 0:23:10.840 of our portfolio companies as well, the very very successful 0:23:10.880 --> 0:23:15.200 after going after a successful IPO. But many cases, companies 0:23:15.240 --> 0:23:18.280 are going to be acquired prior to going I P O. 0:23:18.359 --> 0:23:20.720 And this isn't new. But I think, you know, people 0:23:20.760 --> 0:23:23.840 sometimes think the M and A market people buy when 0:23:23.880 --> 0:23:26.000 things or prices are low or whatever, that it's going 0:23:26.080 --> 0:23:29.520 to be counter cyclical to the I p O market, 0:23:30.240 --> 0:23:33.359 But just isn't true. It's been consistently the case that 0:23:33.440 --> 0:23:36.199 I p O s and M and A, certainly in 0:23:36.200 --> 0:23:40.959 the tech sector cycled together. Well, what ap app Dynamics, 0:23:40.960 --> 0:23:43.600 which was purchased by Cisco. Would that be an example, 0:23:44.520 --> 0:23:47.320 it's a particularly vivid example. Happened to be another IPP 0:23:47.440 --> 0:23:51.439 portfolio company, the very successful one. They got to the 0:23:51.240 --> 0:23:54.720